The National Association of Pension Funds has described the cap as a ‘blunt tool’.
Photograph: Nigel R. Barklie/Rex

Millions of workers will get better value for money when fees for managing their pension pots are capped at 0.75% from April 2015, the City regulator has said. But the government is still under pressure from some quarters to cut the maximum fee to 0.5%.

The new “charge cap” applies to employees being put into a workplace pension under the auto-enrolment regime introduced in October 2012.

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This requires all employers to automatically enrol eligible workers into a pension scheme into which both the employee and the company make payments. Many of these employees will not actively choose a fund in which to invest their money, and will be put into the scheme’s “default” fund.

The Financial Conduct Authority (FCA) has now confirmed its final rules requiring charges on auto-enrolment default funds to be capped at 0.75% a year of funds under management from 6 April 2015.

Christopher Woolard, the FCA’s director of strategy and competition, said: “It is important that those saving into workplace pension schemes get value for money, and this is especially true for those not playing an active role in deciding where their money is invested.

“Schemes need to work effectively for members, and the charge cap, alongside other new measures … will help to ensure this going forward.”

The Department for Work and Pensions has said small differences in charges can have a major impact on a pension pot by the time a person retires. An average earner who builds up a pension pot of £30,000 could benefit to the tune of £1,600 by saving in a scheme charging 0.75% compared to one that charges 1.5%, the DWP said last autumn, adding that for many people the boost could run into “tens of thousands of pounds”.

But the National Association of Pension Funds has described the cap as a “blunt tool”, at a time when competition is already driving charges down below the 0.75% level.

Legal & General said it was the first insurer to cap charges at 0.5% on default auto-enrolment schemes, and added: “A more realistic cap should be 0.5% for new schemes.”

Meanwhile, the government has set up a scheme for employers to join called Nest (National Employment Savings Trust), which imposes an annual management charge of 0.3% on the total value of a member’s fund each year. However, there is also a contribution charge of 1.8% on each new payment into a member’s retirement pot.

The FCA rules also mean that the firms running the pension schemes will be prevented from paying or receiving consultancy charges, and from charging active and “deferred” members of schemes differently based on whether they are paying in or not.